Finding good penny stocks involves looking for many key factors, including experienced management and solid balance sheets

A penny stock in general trades for under five dollars a share, and as the name implies, sometimes for pennies. Most of the time they’re young companies, or start-ups in speculative areas.

Finding good penny stocks can lead to a big payday when you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.

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Consider these eight tips if you want to find penny stocks worth investing in

Here are eight Successful Investor tips we consider when we analyze penny stocks for aggressive investors.

1. We compare the market cap of the stock with the estimated value of the company’s reserves, future product sales and so on.
2. We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
3. We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
4. We like to see a solid balance sheet with manageable debt. Even better, we like to see a major partner who can finance a mine, software and so on to production.
5. We want to see experienced management with proven ability to develop and finance a new business.
6. We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
7. We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
8. We avoid penny stocks that promote themselves too aggressively (or do so misleadingly).

Look closely at the company in question for finding good penny stocks for your aggressive portfolio

With all stocks, and especially with penny stocks, it’s important to take a careful look at the company in which you’re planning to invest. Does it have a strong balance sheet, an experienced management team and good potential for future earnings? Or is it simply smoke and mirrors—over-hyped, trading at unsustainable levels or more interested in stock promotion than the development of a mine, product or service?

When investing in penny stocks, in addition to looking at the company fundamentals, it’s also important to take a look at industry-specific considerations that apply to technology, mining and software development because that’s where penny stocks are often found.

Avoid unscrupulous penny stock promoters as you pursue finding good penny stocks and look to limit your risk

Penny stock promoters love to make deals (however tenuous or indirect) with major, household-name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

And when penny stock promoters get a deal with a major, they go to great lengths to make it seem bigger than it is.

In fact, when a penny stock shoots up on the news of big-company involvement, and the mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.

Use our sell-half rule when you do find good penny stocks that move up

In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.

That’s also why we think you should apply our sell-half rule.

Selling half your holdings after the stock price doubles is a good strategy for any high-risk investment, but especially so for penny stocks.

This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

Use our three-part Successful Investor approach when you are adding stocks to your portfolio—including good penny stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Bonus tip: Favour facts over predictions in your stock market picks

Predictions never work out as well as hard facts.

You see this again and again in investing. For example, stock market predictions are terrible at determining what actual changes will take place in an industry. It’s even harder to predict how long those changes will take to appear. Of course, adverse changes are hardest on companies with bad financing, poor products, weak management or other drawbacks. Meanwhile, successful companies figure out ways to adapt and even profit from change.

Most successful investors agree that it’s a good idea to base investment decisions on facts rather than stock market predictions. You can make mistakes with facts, of course, but predictions have a much higher failure rate.

Finding good penny stocks is not easy. Many are marketing promotions in disguise.

What industries are you currently looking at for penny stock opportunities?